When people consider filing for bankruptcy, one of their primary concerns is whether tax debts, particularly IRS debt, can be discharged. Contrary to popular belief, IRS debt be discharged in Chapter 7, but certain conditions must be met. While many taxes cannot be eliminated through bankruptcy, some income taxes may qualify for discharge under the right circumstances. This article will explain the specific requirements for discharging IRS debt, what types of taxes are not eligible, and how bankruptcy affects tax liens.
Common Myths About Tax Debt and Bankruptcy
Many believe the myth that bankruptcy cannot discharge IRS debt, but this isn’t entirely true. You can discharge IRS debt in Chapter 7 if you meet specific criteria. Chapter 7 bankruptcy, also known as liquidation bankruptcy, allows individuals or businesses to eliminate many types of debt, including certain tax debts, as long as they meet the necessary conditions.
It is essential to consult with a bankruptcy attorney to determine if your tax debt qualifies for discharge. Understanding the legal requirements and restrictions is key to navigating the process successfully.
Requirements for Discharging IRS Debt in Chapter 7
To have your IRS debt discharged in Chapter 7, you must meet several strict requirements. These rules ensure that only specific income taxes qualify for discharge, protecting the government from losing significant revenue due to misuse of the bankruptcy process. Below are the key criteria:
1. Income Taxes Only
The only tax debts eligible for discharge in Chapter 7 bankruptcy are income taxes. If your IRS debt is related to other types of taxes—such as payroll taxes, sales taxes, or property taxes—those debts are not eligible for discharge. The debt must be related to either federal or state income taxes.
2. The Three-Year Rule
Your tax return must have been due at least three years before filing for bankruptcy. This includes any extensions that were filed. For example, if your 2005 tax return was due by April 15, 2006, and you received a six-month extension, the deadline would be October 15, 2006. To discharge the debt related to that tax return, your bankruptcy petition would need to be filed after October 15, 2009.
3. The Two-Year Rule
The tax return for the debt in question must have been filed at least two years before filing for bankruptcy. It’s important to note that if you file a late tax return, most courts will not consider it an official return. This could result in your inability to discharge the tax debt. However, some courts may allow the discharge of taxes even with a late-filed return, so it’s important to consult a bankruptcy attorney to understand the laws in your jurisdiction.
4. The 240-Day Rule
The IRS must have assessed your tax debt at least 240 days before you filed for bankruptcy. This “assessment date” is when the IRS officially records the amount of tax debt owed, and the 240-day period can be extended if there were delays caused by a prior bankruptcy filing or a compromise offer made by the IRS.
5. No Fraud or Tax Evasion
You cannot discharge IRS debt in Chapter 7 if the IRS determines that you committed fraud or willfully attempted to evade paying taxes. This includes filing a fraudulent tax return or engaging in illegal activities to avoid paying the taxes you owe. The IRS would need to prove to the bankruptcy court that fraud occurred to prevent your tax debt from being discharged.
If you meet these five criteria, IRS debt be discharged in Chapter 7, freeing you from the obligation to repay these tax debts.
Non-Dischargeable Tax Debts
While IRS debt be discharged in Chapter 7, there are some tax obligations that cannot be wiped out through bankruptcy. Below are some examples of non-dischargeable tax debts:
1. Tax Liens
Even if you discharge the personal obligation to pay income taxes, any tax lien filed against your property before bankruptcy will remain. This means that while the IRS cannot pursue your wages or bank account, they can still enforce the lien against your property. If you want to sell your property, the tax lien will need to be satisfied.
2. Recent Property Taxes
You cannot discharge property taxes due within one year of filing for bankruptcy. However, you may discharge personal liability for property taxes owed more than a year before filing for bankruptcy. Keep in mind that counties may file tax liens against your property for unpaid property taxes, which would remain after bankruptcy.
3. Trust Fund Taxes
Trust fund taxes, such as those related to FICA, Medicare, and income taxes that employers must withhold, do not qualify for discharge. Employers collect these taxes from employees on behalf of the government and remain responsible for paying them.
4. Employment, Excise, and Customs Taxes
You may not discharge some employment taxes, excise taxes, and customs duties, depending on the specific circumstances and time periods.
5. Penalties and Fines
Tax penalties associated with events that occurred within three years of filing for bankruptcy are non-dischargeable. This includes punitive fines related to tax fraud or evasion.
The Difference Between Tax Debt and Tax Liens
It’s essential to understand the distinction between tax debt and tax liens when filing for Chapter 7 bankruptcy. Tax debt refers to the amount of money you owe to the IRS or your state for unpaid taxes, while tax liens attach to your property as legal judgments to secure repayment of that debt.
Even though Chapter 7 can discharge IRS debt, tax liens filed before your bankruptcy will remain on your property. This means you are no longer personally responsible for the tax debt, but you must pay the lien if you plan to sell the property in the future. The discharge eliminates the IRS’s ability to pursue your income or assets but does not remove the lien itself.
How a Bankruptcy Attorney Can Help
Navigating the bankruptcy process and determining whether your IRS debt qualifies for discharge in Chapter 7 can be complex. You must consult a bankruptcy attorney to meet all the requirements and handle your debts correctly. An attorney can guide you through the filing process, assess your eligibility for discharge, and represent your interests in court.
At Bruner Wright P.A., we specialize in helping individuals and businesses manage their financial challenges through bankruptcy. If you have questions about discharging IRS debt or other tax obligations, contact our team for a confidential consultation.
In Conclusion
IRS debt be discharged in Chapter 7 If you meet specific criteria, such as following the three-year, two-year, and 240-day rules, and have not committed fraud or willfully evaded taxes, you can discharge IRS debt. However, certain tax debts, such as trust fund taxes, property taxes, and tax liens, are not dischargeable. Understanding the difference between tax debt and tax liens is essential when considering bankruptcy as a solution to your financial difficulties.
For more personalized advice, consult with a qualified bankruptcy attorney who can guide you through the process and help you achieve financial freedom. Ask Bruner Wright!